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This chapter is from the book

Strategies for Latin Markets

The framework so far has described the dynamics of drivers and adjustment of the region's economies to external shocks and internal market conditions. We also explained the increasing link of the region with the global economy through trade, investment, and connectivity flows. The region's competitiveness, although lagging, is improving in certain sectors and making it possible for Brazil and Mexico to be part of the global supply chain in important sectors such as the automobile industry. In earlier chapters we reviewed the industry transformation in consumer markets, banking, infrastructure, and health. In those chapters we observed the massive transfer of government-owned assets to private ownership. In other sectors, such as consumer goods, the transformation has been characterized by industry consolidation and integration through mergers and acquisitions. The strategy of global players in the retail industry shows their intent to build regional strategies. In Chapter 1 we identified the two broad global strategies of shapers and adapters. Shapers, in turn, were said to be either specialists or integrators. Latin American-owned companies were identified as regionals. In Chapter 4 we refined this framework in terms of the degree of business integration and market aggregation. Based on these two dimensions, we identified the subcategories of strategy as broad regional integrators, narrow regional integrators, broad regional specialists, and narrow regional specialists.

The analysis has identified that a few Latin American firms have become formidable national champions. These strong national firms could emerge as regional integrators or as global specialists. The next generation of Latin stars will follow the examples of Cemex or Embraer at the global level or Bimbo and Gruma at the regional level. In Chapters 4 and 5 we analyzed the performance of strategies in the infrastructure and consumer markets and retail sectors. Our analysis of the infrastructure sector found that specialists tend to have high returns on sales (ROS) and net worth (RONW); integrators had low returns. In terms of assets, by their nature of business, specialists have small asset and revenue bases, whereas integrators have large asset size and revenues. National champions in infrastructure were mostly state-owned utilities with poor returns and medium-sized assets and revenues. The largest national champion, Telmex, is the largest Latin American firm in terms of revenues, market capitalization, and revenues and also delivered the best returns of all firms in the infrastructure sector. In the consumer sector, we found similar results. Specialists achieved better returns than integrators and national champions. In this case, however, broad regional specialists were as large in size as integrators. National champions in consumer goods were also large in size, but their returns on sales and net worth were average. We did not identify any shapers in the consumer goods sector. In the banking industry (see Chapter 6) we found that the top 50 Latin American banks had large asset bases. Most of the banks follow a broad regional integration strategy, and very few, such as Santander, are able to act as shapers. Given that the nature of the banking business is different from the two other sectors, it is difficult to compare the performance results of banks and that of the other sectors we analyzed. The strategies of pharmaceuticals companies reviewed in Chapter 7 revealed that the dominant players are dominant global integrators that have built their presence in Latin American through acquisitions. One or two national champions claim some market share in their local markets, notably Aché in Brazil and Roemmers in Argentina, but have very weak prospects to expand regionally due to weak innovation and poor patent protection.

TABLE 8.1 Performance of Alternative Strategies in Latin Markets1

Strategy Number of Firms Total Assets ($ millions) Employment Market Capitalization, 12/31/00 ($ millions) Net Worth ($ millions) Revenues ($ millions) Revenue Change 2000/ 1999 (%) Net Profit ($ millions) Net Profit/ Revenue (%) Net Profit/ Net Worth (%)

Broad regional integrator(BRI)

44

3,847

6,979

3,115

1,549

1,795

14.4

73

1.63

7.6

Broad regional specialist (BRS)

7

3,201

33,211

5,236

1,793

2,963

25.5

111

3.3

2.4

Narrow regional integrator (NRI)

24

2,504

11,686

4,773

973

2,597

16.1

79.6

5.8

9.2

Narrow regional specialist (NRS)

1

2,112

676

1,247

1,088

480

11.6

126

11.6

26.3

National champion (NC)

26

3,102

22,845

3,102

1,201

2,354

23.1

170

3.5

7.5

State-owned enterprises (SOE)

11

8,148

5,014

3,905

5,333

1,465

2.6

160.6

2.1

2.3

All firms

113

7,582

12,618

4,217

1,792

2,123

16.3

112.7

3.2

7.1


Our analysis of the regional strategies in the infrastructure and consumer goods sectors provides a broader perspective of strategy in Latin America. The strategy profile of 113 firms is shown in Table 8.1. The results in this table reveal that 44 firms used a broad regional integration strategy and 24 firms used a narrow regional integration strategy. Among the specialists, seven were broad regional specialists, and only one firm was a narrow regional specialist. Among the national firms, 26 were privately owned national champions and 11 were state-owned enterprises. In terms of size, broad regional specialists are very large in terms of employment, market capitalization, and revenues. These specialists were found mostly in distribution-intensive mass consumption businesses, such as the beverage sector. Broad regional integrators are asset intensive, as indicated by their large average asset value. These broad regional integrators are mostly in infrastructure business. In terms of revenues, broad regional specialists and national champions have experienced the largest increases in revenues in 2000. Firms using the latter two strategies also report the largest average profit of all firms in our analysis. The worst performers in terms of change of revenues were state-owned enterprises. In terms of returns, the best performer is the single national specialist, with returns on sales of 11.6% and a 26.3% return on net worth. The next-best performer strategy is the narrow regional integrator, with an average return on sales of 5.8%, almost twice the average return for all firms, and a 9.2% return on net worth.

We did not find shaper strategies in infrastructure and consumer goods. In Chapter 1 we pointed out that Mexico's Cemex and Spain's BBVA were examples of shaper strategies. These two companies were not included in our database, because of the limitation on the comparability of firms in the banking business with the other sectors in our analysis. In the case of Cemex, our focus on the infrastructure sectors was on the operations and not on the companies providing inputs to the sector. As mentioned in Chapter 1, Cemex can be described as a shaper in the construction industry. Cemex is also a global player, one of the top three largest firms in the cement industry. Cemex's intensive use of informational technology has helped this firm to become the top performer in the building-materials industry in 2001. Cemex's profit margin of 15.6% was much better than that of its two largest global competitors, Lafarge and Holderbank, and five times the industry average of 2.8%.

ABLE 8.2 Performance of Firms of Different Revenue Size in Latin Markets2

Revenue Cluster Number of Firms Average Revenue ($ billions) Average Total Assets ($ billions) Average Number of Employees Average Market Capitalization ($ billions) Average Net Worth ($ billions) Average Change in Revenue (%) Average Profits ($ millions) Average Return on Revenues (%) Average Return on Net Worth (RONW) (%) Best in Revenue Group (Strategy)a
Greater than $10 billion 1 10.7 16.4 74,911 40 5.1 19.5 2,756 26 53 Telmex (NC)
Between $5 and $10 billion 7 7.4 9.7 18,495 7.0 6.4 67.6 443 6.8 8.6 Sanborns– Mexico RNW = 12.2 Wal-Mart Mexico (BRI) RONW = 12.2
Between $3 and $5 billion 15 3.7 7.4 25,845 4.0 2.8 12.9 217 3.8 5.8 FEMSA– Mexico (BRS) RONW = 14.5
Between $1 and $3 billion 55 1.8 2.8 12,159 3.7 1.3 12.9 53 3.1 10.1 Nestlé-Brazil (BRI) RONW = 23.3
Less than $1 billion 35 0.6 1.9 2,590 1.3 0.9 12.6 23 1.8 2.8 Alestra– Mexico (NRI) RONW = 27.7

A strategic control map provides a visualization of our analysis of types of strategy and performance. The examination of several combinations of performance (return on sales and return on net worth) and size (value of total assets, employment, market capitalization, and revenues) was consistent in providing the same conclusion: that specialists are positioned in the upper-left quadrant and integrators are clearly positioned in the lower-right-hand quadrant. For illustration purposes, we include the chart that shows the relation of total revenues and return on net worth (see Figure 8.5 and the supporting information in Table 8.2). Figure 8.5 suggests that in between these two extremes, one finds a spread of firms with a combination of broad regional specialists, national champions, narrow regional integrators, and state-owned enterprises. Shapers could be identified in the upper-right-hand quadrant of large size and high performance. Besides the examples of Cemex and BBVA in banking, the only other firm that falls in such a quadrant is Telmex. In a strict sense, Telmex is not a shaper since this company has not altered the industry strategy in the same way as Cemex and BBVA have, with their emphasis on technology. Telmex is a very large incumbent in the telecommunications sector that up until now has enjoyed market protection. In the future, as competition intensifies in this sector and Telmex expands regionally, the company's position in the chart will move closer to that of the broad regional integrators.

The strategic map in Figure 8.5 clearly shows the pull of the two possible extremes of strategy in Latin America: integration and specialization. In our snapshot of strategy in 2000, the majority of companies are clustered in the lower-left-hand quadrant. The position of firms as small or average-size companies with average to low returns is not sustainable in the future. In contrast, a handful of firms have achieved large size and generate greater returns than those of their smaller rivals. A handful of small firms have pulled out of the pack and have been able to deliver superior returns. These small champions are a mix of specialists, narrow regional integrators, and broad regional integrators. The majority of firms in Latin markets have to decide whether they want to become specialists or integrators. The threshold for such a decision is indicated in Figure 8.5 as the ditch, the change in slope between the small exemplars and the large integrators. The threshold for the ditch appears to be at annual revenues between $3 to $5 billion and $7.4 billion in total assets.

Figure 8.5Figure 8.5 Latin American Strategic Control Map


A shift to specialization may require shedding assets and concentrating on core businesses where above-average returns can be generated. A shift to an integrator position is more troublesome. Firms in this group do not seem to have any incremental advantage over smaller competitors, as indicated by similar average increases in revenues and returns on sales with the disadvantage of a larger employment base. As firms succeed in crossing the threshold size, the average increase in revenues is multiplied by a factor of 5 and returns increase by a factor of 1.5 or more. As not all firms will succeed in crossing the ditch, many will become casualties of increased competition from larger competitors or will pursue consolidation with other firms facing the same dilemma.

A shift toward increased size and integration may lead the industry to consolidate. The effort here is to increase the scale and size of business. To do so, firms may increase their size through acquisitions. For foreign multinationals, this approach may be the only way to continue delivering profits and revenue growth in stagnant markets. For Latin American multinationals, increasing scale through acquisitions or organic growth will be extremely difficult, given the high costs in international capital markets for Latin American investments. In either case we anticipate substantial industry consolidation as firms in the lower quadrant are either integrated into other consolidators or exit the market. Narrow regional integrators seem to have broken out of the pack of vulnerable firms as they have achieved a relatively large size and are delivering good returns. Broad regional integrators of relatively smaller size have achieved scale in other ways, through asset size. As physical assets are local by nature, improvement in long-term returns may rest on the ability to connect dispersed assets to provide regional services in new sectors, such as the Internet and data transmission.

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